A recent Information Letter released from the Department of Treasury (Information Letter 2016-0077) provides a good reminder about understanding how an IRC Section 125 (cafeteria) plan, specifically a flexible medical spending account (FSA) plan, handles plan forfeitures. The question asked in this Letter relates to whether unused funds of a former plan participant of an FSA plan are required to be relinquished to the U. S. Treasury. The answer to this question is, “no”. Forfeitures in a cafeteria plan or FSA plan can only be used in the manner specifically provided for in the plan document, and cannot be returned to the participant on a dollar for dollar basis. Generally, the plan document will provide that forfeitures can be used to defray administrative costs, or to reduce future contributions, or both. Thus, it is important that the terms and conditions of the plan are followed, specifically as it relates to forfeitures of unused funds.
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